Exercise ISO stock options in a Roth?

[Guest Rickthetech]

Can ISO stock options be legitimately purchased by a Roth IRA?

Rick The Tech:confused:

[Kirk Maldonado]

No.

[mbozek]

Did you mean IPO (Initial public offering) instead of ISO? An IRA can purchase shares issued in an IPO provided that the applicable securities and state laws are observed and the the IRA purchases the stock from the issuer for cash.

[jpod]

Why would he have said "ISO" and "stock options" in the same breath if he meant "IPO"?

[Guest Rickthetech]

I meant ISO, Why not? I don't own the stock and would be purchasing it from the company, not myself, so it shouldn't be a prohibited transaction.

Rick

[jpod]

Rickthetech:

The difficulty is that there is no way, legally, for you to get the option your holding into the hands of the Roth IRA trustee/custodian.

And, there is no way for you to take cash from the Roth IRA, use it to exercise the option, and then get the stock acquired upon exercise of the option into the Roth IRA.

There are several legal obstacles to either approach; way too many to describe in a message board format. Take our word for it; it won't work.

[mbozek]

Rick: You need to clarify what you want to purchase for your IRA: Is it stock of the employer for whom you work? ISOs are a special type of stock option which cannot be held in an IRA. However an employee can always direct an IRA custodian to buy stock for an IRA on a stock exchange unless the employee owns more than 50% of the company. It is also possible for the employee's IRA to purchase stock directly from the company but this type of purchase is subject to federal and/or state securities laws.

[mbozek]

jpod: Under both state and federal securities laws, a stock subscription /options offerred to an employee can be purchased directly from the issuer by family entities and affiliates of the employee such as a trust or custodian. You must read the prospectus /offering circular to determine who can be a purchaser of the stock rights offerred to the employee. Under certain circumstances an IRA of an employee can be a qualified purchaser of stock under an option plan offerred to the employee as long as the IRA purchases the securities for cash from the company. However, most IRA custoidian will restrict investment in this kind of an offering.

[jpod]

Thank you for the free education.

However, I believe that the poster said, twice, that it was an ISO.

[Guest Rickthetech]

OK,

I read "The Plan" for the ISO grant. Only the employee can purchase the shares. The right to purchase the shares is not transferable in any way. So I can't have the IRA administrator exercise the options.

Also, I can't remove the funds from my Roth and purchase the shares to put back in the Roth because I can only move cash into and out of an IRA.

Now for a related question not dealing with any ISO.

If I purchase options (the right to purchase a block of open market stock at a preset price on a future date) with funds "out of pocket" can those options be purchased using my Roth IRA? I would guess this would entail providing the administrator with the option paperwork?

Rick the Tech

[mbozek]

Contact the CBOE- Chicago Board Options Exchange for materials on trading options in an IRA. There should be a web site.,

[John G]

You can only buy or hold a restricted list of option types in an IRA and only if your custodian allows options in the IRA (some do not even though IRS regs would not prohibit). For example, most custodians will allow you to sell covered calls for stock you currently hold (and must hold until the option expires). Many will allow you to own an option to buy a publicly traded stock, since your max at risk amount is exactly the initial price you pay. What you can not own in an IRA is any option that exposes the account to unlimited liability. The reason for this is that you just can't pump additional funds into an IRA if the option hurts you.

Option trading is a significant notch above normal investing in terms of the knowledge required and the tracking of the investment. You should also understand that the transaction costs of options are a significantly larger percent of the trade. From the questions that you posted, I would surmise that you are not an extremely sophisticated investor. I may be wrong, but if this is true I would not recommend plunging into options within an IRA. For example, if you can not define the term "straddle" or do not know the option expiration date, then you should probably not be involved in options trading.

I am not implying that options are bad, just that they are more sophisticated investments were novices are unlikely to be successful. Some investors have a "grass is greener on the other side of the fence" complex when it comes to options. If you are having trouble making money with standard investments, there is little chance that you can make money in options.

[Guest 1rickosisaparty]

You can only buy or hold a restricted list of option types in an IRA and only if your custodian allows options in the IRA (some do not even though IRS regs would not prohibit). For example, most custodians will allow you to sell covered calls for stock you currently hold (and must hold until the option expires). Many will allow you to own an option to buy a publicly traded stock, since your max at risk amount is exactly the initial price you pay. What you can not own in an IRA is any option that exposes the account to unlimited liability. The reason for this is that you just can't pump additional funds into an IRA if the option hurts you.

Option trading is a significant notch above normal investing in terms of the knowledge required and the tracking of the investment. You should also understand that the transaction costs of options are a significantly larger percent of the trade. From the questions that you posted, I would surmise that you are not an extremely sophisticated investor. I may be wrong, but if this is true I would not recommend plunging into options within an IRA. For example, if you can not define the term "straddle" or do not know the option expiration date, then you should probably not be involved in options trading.

I am not implying that options are bad, just that they are more sophisticated investments were novices are unlikely to be successful. Some investors have a "grass is greener on the other side of the fence" complex when it comes to options. If you are having trouble making money with standard investments, there is little chance that you can make money in options.

Thank you for the insight on using stock options as an investment vehicle for IRA's. I have been trying to find out in detail if stock options are allowable under self-directed Roth IRA rules and so far your comments are the only info I have found. I am wondering if you could offer any further clarification on what options are allowable or where I could do some more research and get documentation of same. Thank you, Rick S

[John G]

The most restricted set of rules are those developed by your custodian. Note, they may be more restricted than what the IRS might allow, but unless you change custodians, or your custodian modifies their rules, those are the restrictions you live by.

Call your custodian and ask for the IRA department. Don't speak to the lowest level clerks that man the counters are are the first folks who answer the phone...they may not be aware of the subtle differences in IRA/Roth policies. The "back office" IRA desk will have handled this question before and can answer your questions. For example, at Schwab, you will probably be talking with someone in San Francisco at their IRA desk. I have been told that some brokerages, such as Etrade, try to keep you from finding out the phone number of their "back office" which if I recall is in St Louis, MO, you have to be persistent.